Chapter 4: The investment needs of South African institutions

Question 1

Reasonable investment related expectations are likely to include:

Answer 1

• That the investment policy will follow that stated by the company in any published or official material
• That, over the long term, the investment return should be higher than under a without profits policy
• That bonus rates are consistent with material published by the company, taking into account past bonus records.

Question 2

A company transacting with profits business may also have the following liabilities:

Answer 2

• Without profits liabilities: Particularly term insurance and annuity business, which should usually be considered as fixed liabilities (i.e. guaranteed in monetary terms)
• Future expenses: Expenses are mainly staff costs, and thus should be considered “real’. (Note that in evaluating the size of a company’s liabilities, the allowance for future expenses may be implicit in a conservative valuation basis, rather than as an explicit amount.)
• Contingent options and guarantees: These may warrant the adoption of derivative strategies.

Question 3

Other liabilities may include:

Answer 3

• Any traditional without profits policies (particularly short-term investment contracts and annuity business)
• Future expenses: To a large extent, future expenses are paid for by making deductions from policyholders’ unit holdings. However, the company will need to cover any expenses which it can’t expect to recover in this way.

Question 4

The liabilities of a short-term insurer are largely in respect of insurance claims yet to be paid. The amounts will be a mixture of:

Answer 4

• Amounts linked to various forms of inflationary increase

* Amounts which are largely expressed in monetary terms.

Question 5

4. Medical scheme liabilities

Answer 5

The majority of liabilities of medical schemes are in respect of current administration costs and covering medical costs incurred by members. This implies that a high level of liquidity is required in the fund, with investments predominantly in the money market. Investment guidelines for medical schemes can be found in Regulations 29 and 30 of the Medical Schemes Act, No. 131 of 1998.

The reserves of medical schemes are currently set at a minimum of 25% of gross contributions by medical scheme beneficiaries.

Question 6

For a final salary scheme as a whole, the nature of the liabilities depends on:

Answer 6

• The benefits provided
• The basis for pension increases
• The mix of young employees, old employees and pensioners.